The Consumer Financial Protection Bureau (CFPB), Recent Developments: July 22, 2013 - August 9, 2013
CFPB Files Complaint against Mortgage Lender for Improper Bonuses
On July 23, 2013, the CFPB filed a complaint in the United States District Court of Utah against Castle & Cooke Mortgage LLC, as well as two of its senior officers, for allegedly giving bonuses to loan officers who steered consumers into higher interest rate mortgages.
According to the CFPB, Castle & Cooke is a mortgage company that does business in 22 states, maintains 45 branches, and originated approximately $1.3 billion in loans in 2012. The CFPB alleges that since 2011 Castle & Cooke has improperly upsold thousands of customers into higher interest rate mortgages, and rewarded its loan originators for doing so. The CFPB asserts that this conduct violated the Federal Reserve Board’s Loan Originator Compensation Rule that banned compensation based on loan terms such as the interest rate of the loan.
Castle & Cooke is alleged to have maintained a bonus program that paid more than 150 loan officers greater bonus compensation, in the range of $6,100 to $8,700, when the loan officers persuaded consumers to subscribe to more expensive loans. Significantly, the CFPB alleges that those loan offices who did not charge consumers higher interest rates did not receive quarterly bonuses.
Castle & Cooke is also alleged to have failed to retain its compliance records in violation of applicable law that requires creditors to retain evidence of compliance with the rule. Moreover, Cooke is alleged to have failed to record what portions of an officer’s bonus was attributable to a particular loan, and failed to reference the bonus program in each officer’s compensation agreement.
In the complaint,1 the CFPB seeks to enjoin the bonus program, require mandatory recordkeeping, and secure restitution for Castle & Cooke’s customers who were upsold. In addition, the CFPB is seeking civil monetary penalties against Castle & Cooke and its two officers for each bonus that was paid.
CFPB Reports Findings Regarding Payday and Deposit Advance Loan at Senate Hearing
On July 24, 2013, David Silberman, Associate Director of Research, Markets, and Regulations at the CFPB, testified before the Senate Special Committee on Aging. The purpose of Mr. Silberman’s testimony was to report the findings of the CFPB’s recent study of payday and deposit advance loan products, as had been previously set forth in the CFPB’s white paper on the topic earlier this year.
Mr. Silberman explained that the CFPB has found that payday and deposit advance loans are leading many consumers into long-term cycles of debt – contrary to the products’ intended purpose of short-term or emergency use. He noted that the CFPB’s study revealed that 13 percent of payday borrowers took out only one or two loans per year, 48 percent took out 11 or more loans per year, and 14 percent took out 20 or more payday loans annually. Of particular concern to the CFPB is the fact that 18 percent of payday loan borrowers report their primary source of income as being public assistance rather than private employment.
Mr. Silberman informed the Committee that the CFPB intends to continue studying small loan products to better understand why some consumers are able to use these products in accord with their intended purpose, while others fall into a “cycle of debt.” Moreover, the CFPB intends to review and analyze state law limitations on these products to assist in curbing the sustained use of these products. Mr. Silberman noted that Richard Cordray, the CFPB’s Director, has stated that “the [CFPB] will work to make sure that consumers can get the credit they need without jeopardizing or undermining their finances. Debt traps should not be part of their financial futures.”
New Suit Asserts CFPB is Unconstitutional
A Connecticut attorney and a company whose personnel served as support staff for that attorney have filed suit against the CFPB in the United States District Court for the District of Columbia.2 The suit is in response to the CFPB issuing a Civil Investigative Demand to the company in order to obtain information it considers relevant to the company’s “relationship with attorneys that provide debt settlement services that are ancillary to their legal representation.”
By way of example, the CFPB seeks personal information of bankruptcy clients, including names, addresses, attorney notes and income information. The CFPB is also allegedly seeking information regarding when clients spoke to their attorneys, the durations and methods of such communications, and amounts paid for attorneys’ services.
The company argues that this information is protected by the attorney-client privilege and should not be disclosed. Further, they assert that continuing the investigation and forcing the company to disclose the requested information may cause attorneys to turn to other business for such services – thereby causing the company financial harm.
In the lawsuit, the plaintiffs also argue that the CFPB violates the U.S. Constitution’s separation of powers because there are no meaningful limits in the Dodd-Frank Act on what the CFPB can deem to be “unfair, deceptive or abusive” conduct, and because there is a lack of presidential and judicial oversight over the CFPB. Specifically, they state that, “[b]y delegating effectively unlimited powers to CFPB, by eliminating Congress’s power of the purse over CFPB, by eliminating the President’s power to remove CFPB’s Director at will, and by limited judicial review of CFPB’s actions and legal interpretations, Title X of the Dodd-Frank Act violates the Constitutions’ separation of powers.”
CFPB Obtains Monetary and Injunctive Relief against Law Firm and Principal
On July 26, 2013 the CFPB obtained a final judgment for $11,403,338.63 and permanent injunctive relief against The Gordon Law Firm, P.C. and Chance Gordon in CFPB v. Chance Edward Gordon, No. CV 12-06147 (C.D. Ca.). The lawsuit – which was initially filed under seal and represented the first federal court civil enforcement action filed by the CFPB – arose out of the defendants allegedly accepting advance fees between $2,500 to $4,500 to modify delinquent loans of distressed consumers and “provid[ing] little, if any, meaningful assistance to modify homeowners’ mortgage loans or prevent foreclosure.” The CFPB had alleged that the defendants’ representations to be able to modify the consumers’ loan terms constituted a deceptive act under Sections 1031 and 1036 of the Dodd-Frank Act.
In the permanent injunction, the court, among other things, enjoined the law firm and principals for three years from advertising or selling any “mortgage assistance relief product or service or debt relief product or service.” The court also prohibited the defendants from “disclosing, using or benefitting from” the customer information it acquired in the course of its business and required defendants to purge customer information “in all forms” within 30 days after disclosing that information to the CFPB. The court also permanently enjoined the defendants from engaging in misrepresentations relating to consumer financial products, including, the terms or rates available for a loan, the person’s ability to improve his credit score or credit record and the amount of savings a consumer will receive from purchasing a certain product.
MBA and ABA Question Applicability of ECOA Appraisal Rule to Business Credit
In a July 19, 2013 letter, the Mortgage Bankers Association (MBA) and American Bankers Association (ABA) questioned the applicability of the CFPB’s appraisal rule to extensions of business credit secured by a dwelling. The rule would amend Regulation B by requiring creditors to provide applicants with copies of appraisals and business valuations secured by a first lien on a dwelling. Reg. B § 1002.14(a). The ABA and MBA cited four particular challenges that the appraisal rule would pose for business loans.
First, the ABA and MBA claim that credit to developers and home builders would be significantly impacted, as the lender would be compelled to send “thousands of appraisals” to entities even though “less than three percent of builder clients request copies of appraisals.” The ABA and MBA claim the appraisal rule would burden the developers and home builders with voluminous documentation and increase the burden of compliance to the creditors, which would be passed to the consumer. Second, the letter asserts the timing requirements are unsuited to business credit. Third, the ABA and MBA claim that a copy of the appraisal adds no value to the business credit applicant since the applicant is typically a business entity, while the dwelling is generally owned by the principal or guarantor. Lastly, the letter questions the assumptions in the burden estimate methodology employed by the CFPB in promulgating the appraisal rule. The ABA and MBA note the CFPB’s claim that the timing of the appraisal disclosure corresponds with the TILA and RESPA disclosures is inapposite as these statutes do not cover business loans. The letter also disputes the CFPB’s claim that adjustments to software “could be part of routine software updates” given that TILA and RESPA do not govern business loans. The ABA and MBA also observe that Title XIV of Dodd-Frank addresses consumer protection and thus “Congress could not have intended to offer such no-cost and disclosure-of-rights safeguards to businesses…or to apportion business costs among two market players for no apparent purpose.”
The CFPB has yet to formally respond to the concerns voiced by the ABA and MBA. The appraisal rule becomes effective on January 18, 2014.
CFPB Publishes Mid-Year Update Summarizing Private Student Loan Complaints
On August 1, 2013 the CFPB Student Loan Ombudsman published its mid-year report analyzing data from 2,002 private student loan complaints it received from October 1, 2012 to March 31, 2013. The CFPB started accepting private student loan complaints in March 2012. The CFPB gleaned from the data the following:
The monthly volume of student loan complaints remained consistent during the six month reporting period;
The most common outcome from the creditor was “closed with explanation”, while “closed” without any relief, explanation or response was the rarest outcome;
$700.05 was the median amount of relief when the action was closed with monetary relief;
62% of the complaints involved an inability to modify the loan repayment terms;
Sallie Mae had the highest number of complaints (794) filed against it; and
The average response time it took a company to respond to a complaint varied from 15 to 58 days.
Payment processing, conflicting information provided by the lender or servicer, a failure to receive disclosures or notices and co-signer issues were also common complaints raised by borrowers.
Judge Dismisses Suit Challenging Constitutionality of CFPB
On August 1, 2013 the U.S. District Court for the District of Columbia dismissed the complaint inState National Bank of Big Spring v. Lew on standing grounds. The suit challenged the constitutionality of the CFPB and Director Cordray’s appointment. Among other things, the plaintiffs alleged in Count I of their Complaint that Title X of the Dodd-Frank Act (which created the CFPB) violated the separation of powers by “delegating effectively unbounded power to the CFPB.” In Count II, the plaintiffs claimed Director Cordray’s appointment was made without the advice and consent of the Senate. The court rejected the plaintiffs’ proposition that an entity need only show it is subject to CFPB regulatory authority to establish standing. In observing that the complaint failed to allege the plaintiffs were subject to an agency action, adverse ruling or enforcement proceeding, the court held the plaintiffs did not plead an injury-in-fact, and thus, lacked standing.
CFPB Issues Revised Response Guidance for Complaint System Portal
The CFPB recently revised its Response Guidance available to companies using its online portal to manage consumer complaints received by the CFPB. It is available here. This Response Guidance is supplemental to the CFPB’s Company Portal Manual, is available here. The Response Guidance contains recommendations for documenting and responding to consumer complaints, providing both general and product-specific guidance. Some of the product-specific guidance is very detailed regarding the information and documentation the CFPB expects companies to include in their responses to consumer complaints.
CFPB Holds Joint Webinar on Indirect Auto Finance and Fair Lending Issues
On August 6, 2013 the CFPB held a joint webinar with the Federal Reserve Board (FRB) and the U.S. Department of Justice (DOJ) on fair lending issues for indirect auto finance programs. Related materials, including a recording of the webinar, are available here. In the webinar, the CFPB’s Fair Lending Director discussed the CFPB’s recent indirect auto lending guidance, Bulletin 2013-02, and steps auto finance companies can take to comply with it.3 The Special Counsel in the Federal Reserve’s Fair Lending Enforcement Section explained the FRB’s process of examining fair lending risk and the DOJ’s Deputy Chief of the Housing and Civil Enforcement Section of the Civil Rights Division discussed related enforcement actions.
The FRB’s Special Counsel explained how the FRB uses proxies to determine borrower race, ethnicity and gender in order to conduct its analysis of potential fair lending violations in loan portfolios. Apparently the FRB “geocodes” loans to determine whether a particular borrower resides in a minority or majority census tract. Additionally, for example, to determine Hispanic ethnicity, the FRB will use census lists of common Spanish surnames. In addition, the FRB provided guidance on how auto finance companies can make these determinations themselves for purposes of ensuring fair lending compliance.
During the question and answer session, the CFPB’s representative advised that the CFPB would not refer a matter to the Enforcement Division unless there were a level of statistical certainty of 95 percent or greater that a pricing disparity was the result of discrimination on a prohibited basis. However, regarding compliance with the guidance laid out in its bulletin, the CFPB representative made it clear that the CFPB expects auto finance companies to already be taking steps to comply and that there is no grace period.
CFPB Issues Clarifications to Remittance Transfer Rule
On August 8, 2013, the CFPB released an update to its Small Entity Compliance Guide for International Fund Transfers, available here. The guide summarizes the CFPB’s Remittance Transfer Rule, which was finalized on May 22, 2013. The rule amended Regulation E, which implements the Electronic Fund Transfer Act, by providing new disclosures and error resolution and cancellation rights to consumers who send remittance transfers to persons abroad. The CFPB also issued technical corrections to Regulation E, available here. The Remittance Transfer Rule will become effective on October 28, 2013.
CFPB Issues Proposal to Collect Information on Financial Well-Being
On August 8, 2013 the CFPB issued a notice and request for comment, proposing a new information collection effort titled “Development of Metrics to Measure Financial Well-being of Working-age and Older American Consumers,” available here. The proposal is part of the CFPB’s financial literacy initiative required to be carried out by its Office of Financial Education under section 1013(d) of the Dodd-Frank Act. According to the notice, the CFPB “intends to collect quantitative data through surveys with working-age (age 18–61) and older American (age 62 and older) consumers in order to develop and refine survey instruments that will enable the CFPB to reliably and accurately measure adult consumers’ financial well-being. The primary anticipated data collection strategy is through Internet-based surveys.”
Mortgage Lenders Disclose DOJ and CFPB Fair Lending Investigations
In recent SEC filings, mortgage lenders PNC Financial Services Group Inc. and SunTrust Banks Inc. both disclosed that the DOJ Civil Rights Division and CFPB have initiated investigations to explore whether the mortgage lenders are liable for fair lending violations. In June 2013, PNC was advised by the CFPB that it had authorized settlement negotiations with PNC, and by the DOJ that it had authorized the filing of a civil complaint against PNC. PNC’s 10-Q is availablehere. The DOJ and CFPB are jointly investigating PNC to determine whether the mortgage-loan pricing practices of National City Corp., acquired by PNC in 2008, had a “disparate impact” on protected classes of borrowers in violation of the Equal Credit Opportunity Act.
1 The complaint is available here.
2 The complaint is available here.
3 CFPB Bulletin 2013-02 is available here.